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Right now, no other use case. Though I think your question bakes into it a premise which is itself debatable: that speculation doesn't serve some function in th

by bhupy 6y ago

Right now, no other use case. Though I think your question bakes into it a premise which is itself debatable: that speculation doesn't serve some function in the real economy. Today, most rich people are able to collateralize their ownership in valuable assets to defer capital gains tax (guaranteed long term capital gain) and enjoy asset appreciation while still engaging in consumption and even levered investments in the real economy. Most billionaires live their lives like this: they take loans collateralized on their corporate ownership, and eventually pay them back while still enjoying value appreciation. These DeFi platforms essentially unlock the same for everybody else: if you have your entire savings in a deflationary asset like Gold (or perhaps even the S&P500), you might want to be able to collateralize that for daily spending while still enjoying its appreciation for the future. Cryptocurrencies (especially Bitcoin) are more or less equivalent to digital gold. And with the advent of pegged coins, you can now represent really anything as a cryptocurrency, even equities and derivatives. You could extrapolate this further and imagine a world where even equities and derivatives can be purchased as a tokenized coin on some blockchain; and you'd then be able to take collateralized loans for spending off of your index-fund-backed savings account. You'd eventually pay them back while still enjoying value appreciation. Asset speculation arguably serves a second order function to the real economy. Today, cryptocurrency is only one asset with very limited scope, but one might argue that it's just a start.

graeme 6y ago
That sounds enormously risky for most people. So basically: * Someone has $30,000 in S and P shares * With a smart contract they might put these in escrow for a $20,000 loan * If they pay back the loan they can get the shares back. If they fail to pay back the loan the shares are confiscated, no matter the value the shares are now at. What’s the advantage over traditional finance? You can already get an asset backed loan at a bank for which you pay interest.
- bhupy 6y ago
  > If they pay back the loan they can get the shares back. If they fail to pay back the loan the shares are confiscated, no matter the value the shares are now at. You need to make a slight tweak to this statement. Currently, the smart contract enforces a "collateral ratio" of at least 150%. This means that if the underlying collateral appreciates, you can skim off and take whatever appreciation even before repaying. The only invariant that the contract enforces is that the value of the collateral has to be equal to 150% of the remaining principal. And yes, if they fail to pay back the loan, the shares are confiscated; but the borrower isn't left with "nothing"; rather they're left with 2/3 of their original collateral in cash + any appreciation from the original collateral (minus the principal, of course). For a lot of people, this is a manageable worst-case scenario. > That sounds enormously risky for most people. So basically: It's enormously risky for people that are in grinding poverty. This should obviously not be used as a pay-day loan of sorts. But for people that are in the middle or upper-middle class, this has the potential to be a solid financial instrument that can be used as one of many tools we have at our disposal in financial markets. > What’s the advantage over traditional finance? You can already get an asset backed loan at a bank for which you pay interest. Have you tried to do this? It requires a lot of time, process, and paperwork. The interest rates vary depending on the risk rules of the bank, and banks often charge a percentage of principal just for this service, sort of like what happens when you refinance a home loan. With DeFi, I was literally able to lend and borrow at the click of a button, and that transaction was processed by a network of robots where the transaction fee was flat/fixed. There's a lot of room for improvement to bring down that transaction fee, but it's too early to throw our hands up in concede that we are forever doomed to $80 transaction fees to process these kinds of contracts. Now, does this mean that everyone should move off of traditional finance? Absolutely not, traditional finance can still work out to be better for some people. But the key phrase there is "some people". With DeFi, you now have more options on the market, and that strikes me as a good thing.
  - graeme 6y ago
    Oh wait perhaps I misunderstood. If you have $15,000 in shares pledged as collateral, and they appreciate, and the loan is not repaid, the lender gets the shares, or the shares are sold and the lender gets $15,000 out of the sale proceeds and the rest reverts to the owner?
    - bhupy 6y ago
      The latter; the lender doesn't get to enjoy the appreciation of the underlying collateral. The underlying collateral is simply meant to de-risk an anonymous loan with 0 credit check.
      - graeme 6y ago
        How does the sale work. My impression is smart contracts execute automatically. But if I have say apple stock to sell the market price differs moment by moment. An exchange would be specified, and trade type, and the whole collateral sold then proceeds divided?
        bhupy 6y ago
        I haven't read the full contract yet, but I think it just automatically converts the collateral to the right amount of the coin that's being lent. If you open the markets, you'll see that you earn the highest APY by lending USD-pegged stablecoins like DAI, USDT, etc: https://compound.finance/markets https://compound.finance/markets It's possible to use Uniswap (or some other decentralized exchange) to convert X amount of ETH to Y amount of DAI. The smart contract has access to Uniswap as well as knowledge of Y. Honestly, if you have like $100 to play with, I recommend messing around with it on your own. My $50 loan that cost me $80 was effectively $130 of personal hands-on R&D. If you already invested a little bit into BTC/ETH over the last few years, you might also have "house money" to play with.

by bhupy 6y ago

graeme 6y ago

That sounds enormously risky for most people. So basically: * Someone has $30,000 in S and P shares * With a smart contract they might put these in escrow for a $20,000 loan * If they pay back the loan they can get the shares back. If they fail to pay back the loan the shares are confiscated, no matter the value the shares are now at. What’s the advantage over traditional finance? You can already get an asset backed loan at a bank for which you pay interest.

bhupy 6y ago
> If they pay back the loan they can get the shares back. If they fail to pay back the loan the shares are confiscated, no matter the value the shares are now at. You need to make a slight tweak to this statement. Currently, the smart contract enforces a "collateral ratio" of at least 150%. This means that if the underlying collateral appreciates, you can skim off and take whatever appreciation even before repaying. The only invariant that the contract enforces is that the value of the collateral has to be equal to 150% of the remaining principal. And yes, if they fail to pay back the loan, the shares are confiscated; but the borrower isn't left with "nothing"; rather they're left with 2/3 of their original collateral in cash + any appreciation from the original collateral (minus the principal, of course). For a lot of people, this is a manageable worst-case scenario. > That sounds enormously risky for most people. So basically: It's enormously risky for people that are in grinding poverty. This should obviously not be used as a pay-day loan of sorts. But for people that are in the middle or upper-middle class, this has the potential to be a solid financial instrument that can be used as one of many tools we have at our disposal in financial markets. > What’s the advantage over traditional finance? You can already get an asset backed loan at a bank for which you pay interest. Have you tried to do this? It requires a lot of time, process, and paperwork. The interest rates vary depending on the risk rules of the bank, and banks often charge a percentage of principal just for this service, sort of like what happens when you refinance a home loan. With DeFi, I was literally able to lend and borrow at the click of a button, and that transaction was processed by a network of robots where the transaction fee was flat/fixed. There's a lot of room for improvement to bring down that transaction fee, but it's too early to throw our hands up in concede that we are forever doomed to $80 transaction fees to process these kinds of contracts. Now, does this mean that everyone should move off of traditional finance? Absolutely not, traditional finance can still work out to be better for some people. But the key phrase there is "some people". With DeFi, you now have more options on the market, and that strikes me as a good thing.
- graeme 6y ago
  Oh wait perhaps I misunderstood. If you have $15,000 in shares pledged as collateral, and they appreciate, and the loan is not repaid, the lender gets the shares, or the shares are sold and the lender gets $15,000 out of the sale proceeds and the rest reverts to the owner?
  - bhupy 6y ago
    The latter; the lender doesn't get to enjoy the appreciation of the underlying collateral. The underlying collateral is simply meant to de-risk an anonymous loan with 0 credit check.
    - graeme 6y ago
      How does the sale work. My impression is smart contracts execute automatically. But if I have say apple stock to sell the market price differs moment by moment. An exchange would be specified, and trade type, and the whole collateral sold then proceeds divided?
      - bhupy 6y ago
        I haven't read the full contract yet, but I think it just automatically converts the collateral to the right amount of the coin that's being lent. If you open the markets, you'll see that you earn the highest APY by lending USD-pegged stablecoins like DAI, USDT, etc: https://compound.finance/markets https://compound.finance/markets It's possible to use Uniswap (or some other decentralized exchange) to convert X amount of ETH to Y amount of DAI. The smart contract has access to Uniswap as well as knowledge of Y. Honestly, if you have like $100 to play with, I recommend messing around with it on your own. My $50 loan that cost me $80 was effectively $130 of personal hands-on R&D. If you already invested a little bit into BTC/ETH over the last few years, you might also have "house money" to play with.